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Economic Freedom of the World

In the intellectual battle between state control of resources and free markets, some argue that the market economy now reigns supreme. The Berlin Wall has fallen. Maoism has given way to joint ventures in China. In the U. S. and England, New Democrats and New Labor both claim to support the basics of free markets. The hegemony of free markets appears so complete that noted author Francis Fukuyama has declared that we have arrived at the “End of History.”

Ideology is one thing, reality is another. Much of the world’s population still endures insecure property rights, corrupt courts, and arbitrary bureaucracies. Thugs and tyrants are slow to change their ways. How much progress has been made to liberate people from government control?

For the last decade, we have measured economic freedom around the globe. Our publication, Economic Freedom of the World: 2000 Annual Report, ranks 123 countries by measuring 23 indicators in seven areas: size of government, economic structure and use of markets, monetary policy and price stability, freedom to use alternative currencies, legal structure and security of private ownership, freedom to trade with foreigners, and freedom of exchange in capital markets.

Hong Kong and Singapore share the top rating of 9.4 on a scale of 10. New Zealand, the United States, and the United Kingdom (in order) were the next most free economies in the world. The five least free (in order from the bottom) were Myanmar (formerly Burma), Democratic Republic of Congo (formerly Zaire), Sierra Leone, Rwanda, and Madagascar.

Changes in Economic Freedom Since 1980

We calculated economic freedom ratings of 123 countries every five years starting in 1970. The average economic freedom rating grew from 5.3 in 1980 to 6.6 in 1997 (the last year for which data are available).

One reason the world is now freer is because monetary policy has been reined in. Inflation now robs fewer people of their savings and purchasing power. The median inflation rate fell from 14.5 percent in 1980 to 5.8 percent in 1997. The number of countries with an annual inflation rate below 5 percent rose from ten to fifty-five.

Consumers’ freedom to purchase a wider variety of more affordable goods grew because of lower barriers to international trade. The mean tariff rate fell from 27 percent in 1980 to less than 12 percent in 1997. The average volume of trade relative to GDP increased by 43 percent during the last three decades. Exchange and interest rate controls are now much less common than in 1980.

Although redistribution of wealth through government transfer payments and subsidies continues to rise—averaging 11.3% of GDP in 1997—government consumption of goods and services has leveled off. The top tax rates imposed on countries’ most productive citizens have fallen sharply from 58% in 1980 to 37% in 1997. The U. S., which led the tax cutting wave in the 1980s, now burdens its citizens with top marginal tax rates of 40 to 47 percent (depending on the state), making us less competitive with the rest of the world in terms of taxes.

Economic Freedom and Quality of Life

There are astounding differences in economic and social outcomes between nations that are more economically free than those that are less free. Life expectancy is 20 years longer for people in the 24 most free countries (the top fifth) than in the 24 least free countries (the bottom fifth). Average income per person in the top fifth was $18,108 in 1997, compared to less than $2000 for the bottom fifth.

Several countries have improved remarkably in economic freedom, with corresponding benefits for their people. On our 10-point scale, Chile’s rating rose from 3.7 in 1975 to 6.0 in 1985 to 8.2 in 1997. Chile now ranks 18th, up from 54th in 1975. Between 1985 and 1997, Ireland’s rating rose from 6.7 to 8.7, and its ranking jumped from 26th to 6th. New Zealand’s rating rose from 6.2 in 1985 to 9.1 in 1997; this makes it the 3rd freest economy in the world, up from 32nd in 1985. Between 1990 and 1997, El Salvador’s rating rose from 5.0 to 8.3, and its ranking jumped from 67th to 14th.

Although many people still face governments that are hostile to private property rights, personal choice, and freedom of exchange, economic freedom is advancing and people’s opportunities for prosperity look brighter than ever.

Robert Lawson is an associate professor of economics at Capital University in Columbus, Ohio. James Gwartney is a professor of economics at Florida State University. Their report, Economic Freedom of the World: 2000 Annual Report, is published by a network of institutes in 53 countries headed by Canada’s Fraser Institute.